Breaking down the budget
THE Minister of Finance and Economic Development Professor Mthuli Ncube on November 22, 2018 presented the 2019 National Budget statement whose primary objective is to stabilise the economy by targeting the “twin deficits” of fiscal and current account, which have become major sources of overall economic vulnerabilities, including inflation, sharp rise in indebtedness, accumulation of arrears and foreign currency shortages.
From a diagnostic point of view, the minister got our problems right and his prescriptions, which are outlined here, were well thought.
Dealing with fiscal indiscipline
Prof Ncube proposed a number of measures aimed at containing budget expenditure and revenue generation.
With respect to containment of expenditure, the minister proposed salary cut for senior civil servants by 5%, excluding housing and transport allowances on civil servants bonus, rationalisation of foreign service missions and the retirement of 2917 youth officers. These measures are expected to collectively create annual savings of $92 million.
In the same vein, the minister proposed to undertake biometric registration of civil servants where verification of their educational qualifications will be undertaken with a view of flushing out ghost workers. This is a game changer which is expected to generate more revenue savings.
In addition, the minister noted with concerns that the 2018 budget deficit of $2,292 billion arose from line ministries’ unbudgeted expenditures. In addressing this menace, the minister is proposing to review penalties under the Public Finance Management Act, which will see office bearers abusing financial resources being fined or imprisoned or both. This is a game changer again. Clearly, our biggest problem in this country is lack of discipline. How on earth can line ministries overspend by $2,292 billion without any deterring punishment? The review of the penalties and hopefully their enforcement will help to enforce budget discipline.
With respect to revenue enhancement measures, the minister reinforced the 2% tax on intermediated money transfers. This is painful but very necessary. At this juncture, after the minister has announced robust measures to rein in expenditures, it becomes economically justified for us to play our role as citizens to contribute painfully to the advancement of our beloved country by pay the 2% tax! In addition, the minister raised duty on fuel by 7 cents for diesel and paraffin and 6, 5 cents for petrol. This means that prices will go up. This means that life will continue to be difficult for us but then again, we must endure this pain if we are to take this country forward.
In the same vein, in order to raise ‘domestic lines of credits’ of foreign currency with a view of allocating it to the productive sectors, the minister proposed to charge duty and taxes on motor vehicles, selected manufactured products and agricultural produce. He also proposed that taxes will be paid in the currency of trade. This means that if you are charging your goods and services in US dollars, you will pay tax in US dollars.
What is not clear with this proposal is whether this only applies to business which by nature of their business charges in USD, for example, the tourism sector; or if the Minister is suggesting that there is no issue in the three tier pricing system.
Dealing with trade imbalances
Over the years, Zimbabwe ran trade deficits. In the last ten years, the country recorded a $30 billion trade deficit which was largely dominated by goods which we can be produced locally. These are goods such as cereals, vegetables, chewing gums, diapers, toothpicks, pharmaceuticals, tissues and plastics, etc. In addressing this anomaly, the minister came up with comprehensive measures such as payment of duty in foreign currency for selected agricultural and manufactured goods that are imported into the country. There are also duty rebates on the importation of raw materials and equipment.
These measures, if implemented, are expected to gradually reduce the budget deficit to single digit level, hence, targeting 5% of GDP for 2019 and 4.1% in 2020, and to 3% in 2021. In the same vein, parastatal reforms, rebates on raw materials and equipment as well as duties on unnecessary imports is expected to incentivise companies to support local production, which will result in a reduction of the trade deficit.
The country will witness the gap between real time gross settlement (RTGS) and nostro balances closing. People in the streets will see their savings and RTGS balances regaining value and final convergence of the 1:1 exchange rate in about three years. This is very possible.
Fellow comrades, let us endure the pain and support the Finance Minister and the Central Bank Governor as they coordinate these policies to take us to Canaan. ◆ Dr Mugano (Ph.D) is an author and expert in trade and international finance. He is a Research Associate at Nelson Mandela University, Registrar at Zimbabwe Ezekiel Guti University and Director at Africa Economic Development Strategies. Feedback: Cell: +263 772 541 209. Email: [email protected]